BWXT

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2010, for The Babcock & Wilcox Company (B&W). The filing represents the "Babcock & Wilcox Operations of McDermott International, Inc." prior to the company's spin-off from McDermott International, Inc. (MII). The spin-off was approved on July 2, 2010, with shares distributed on July 30, 2010. B&W operates in two primary segments: Power Generation Systems (boilers, nuclear steam generators, environmental equipment) and Government Operations (nuclear components, uranium processing, and facility management for the U.S. Department of Energy).

Key Financial Metrics

Note: Operating margins for the six months ended June 30, 2010, were approximately 9.2% ($124.4M / $1,350.9M).

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 6% ($43.6M) for the quarter and 11% ($166.2M) for the six months compared to the prior year periods. The Power Generation Systems segment saw a 17% revenue drop over six months, driven by reduced orders for new-build steam generation and environmental equipment due to regulatory uncertainty (overturning of Clean Air Interstate Rule, etc.).
• Operating Income Decline: Operating income fell 5% ($4.9M) for the quarter and 33% ($61.5M) for the six months. The Government Operations segment saw a $16.7M decrease in operating income over six months, largely due to production delays and lower productivity at the Nuclear Fuel Services (NFS) facility following a temporary suspension in late 2009.
• Acquisitions: The company acquired Gotaverken Miljo AB ($8.6M) and GE Energy's electrostatic precipitator aftermarket business ($22.0M) in the first half of 2010, contributing to increased SG&A expenses.
• Spin-Off Transactions: Significant non-cash equity adjustments occurred due to the spin-off, including a $100M dividend paid to MII, settlement of intercompany payables, and a $92.3M reduction in pension liability transferred to MII.

Guidance, Outlook, and Risks

• Regulatory Outlook: Management anticipates that as the EPA finalizes revised rules (expected mid-2011), U.S. customers will increase expenditures on environmental equipment to ensure compliance, potentially boosting bookings.
• Operational Recovery: The NFS facility production operations are fully operational. The commercial development line is expected to be back online by the end of January 2011.
• Liquidity: The company entered a new $700M credit facility in May 2010. As of June 30, 2010, there were no borrowings outstanding, with $438.3M available. Letters of credit issued totaled $261.7M.
• Backlog: Total backlog was $4.37 billion as of June 30, 2010, down from $4.74 billion at year-end 2009. Government Operations backlog ($2.55B) is substantially fully funded.
• Risks: Key risks include the impact of the spin-off, delays in EPA regulations affecting utility capital spending, the ability to fund unfunded pension liabilities, and potential adverse outcomes from litigation regarding former nuclear fuel processing facilities (Apollo and Parks Township Litigation).

Investor Verification Checklist

• Spin-Off Finalization: Verify the completion of the July 30, 2010, distribution and the independence of B&W's financial reporting post-spin-off.
• Regulatory Timeline: Monitor the EPA's release of final emissions rules to assess the timing of the expected recovery in Power Generation Systems bookings.
• NFS Facility Status: Confirm the full operational status of the commercial development line at Nuclear Fuel Services by the end of January 2011.
• Litigation Exposure: Review the status of the Apollo and Parks Township Litigation and the adequacy of the ARCO indemnity and insurance coverage.
• Acquisition Integration: Assess the financial impact and integration progress of the GE Energy and Gotaverken Miljo AB acquisitions.